Hedge Funds are absorbing a punishing $8 million annual hit to their Assets Under Management (AUM) due to high levels of manual processes and outdated trading systems that are causing delays in sending orders out to market.
According to a new analysis from TradingScreen, a typical mid-sized long/short equity hedge fund ($5 billion AUM) wastes, on average, 2.5 hours per day dealing with 200 orders.
One of the most significant factors is poor system integration and manual steps to create, validate, and execute orders. This leads to delays in processing the order; from ideation to execution to booking. Lack of investment into these systems has rendered them slow and reliant on user intervention to re-key information that could be easily automated, both pre- and post-trade. By the time traders and portfolio managers have physically entered this information into their systems and sent orders out to market, prices may not have moved in their favour. For example a hedge fund trading American International Group Inc (AIG), the findings showed that with an order size equating to 2% of the stocks ADV ($6.8 million), the cost of being out of the market due to a 15 minute order delay was 16 basis point (bps) – which is more than 5 times the average brokerage commission cost on an order.
The research, which calculates an average affected notional daily trading volume of $150 million, looks at the opportunity cost for hedge funds using a benchmark that gives the volume weighted average price a stock has traded at throughout the day. These findings come as fund managers continue to evaluate the impact of the mid-March COVID-19 induced volatility on markets, ahead of a potential second wave in the months ahead.
Surika Vosloo, European product manager at TradingScreen, said: “With highly volatile markets, no hedge fund manager wants to be offloading, for example, a large block of FTSE 100 stocks without the required care and attention the order demands. The trouble is, as our findings show, time is quite literally money. With investors currently scrutinising every penny, the last thing any hedge fund manager needs is to be let down by clunky systems struggling to keep pace with a wide variety of order workflows and execution decisions.
“With a second bout of volatility potentially around the corner, trying to find a match for their larger orders continues to present major headaches for hedge funds. The faster they can analyse the potential market impact; the faster these orders can be sent out to market, and costs savings opportunities can be realised.”